Penalty for Underpayment of Estimated Taxes

[rangermom]

My husband and I are both retired and collect pensions from Social Security and OPM.  Federal taxes are taken out.  My husband is also required to take an RMD from his IRA and 401K accounts.  We know what that amount is and calculate that in determining what our estimated taxes should be.  My husband is also self employed and we had a pretty good idea of what his 2021 annual income would be.  We paid estimated taxes on April 15, July 15, and September 15 in 2021 and on January 15, 2022.  The first 3 payments were equal amounts.  But the last payment was $1900 more.  Between our federal withholdings and estimated payments we paid more than 110% of last year's taxes because he was not required to take an RMD last year which reduced our total income.  We are also looking at getting a refund from the government this of about $1650 because we overpaid our estimated taxes. 

Why is TT providing a Form 2210 with an indication we will need to pay a penalty for underpayment of taxes? 

[ColeenD3 · Accepted solution]

It could be because you didn't pay in sufficiently the first three quarters and then paid the majority of it in the fourth.

Underpayment penalties are assessed if you don't withhold or pay enough tax on income received during each quarter.

In fact, it's entirely possible to get hit with an underpayment penalty even though you paid your tax bill in full by the May deadline or are getting a refund.

Example: Taylor is self-employed and estimated next year's tax bill at $20,000. Rather than making 4 quarterly payments of $5,000 apiece, they chose to pay $500 in each of the first 3 quarters, and the remaining $18,500 in the fourth quarter.

When they filed, their actual tax bill came to $17,270 and they got a $2,730 refund. However, Taylor got hit with the underpayment penalty, because they underpaid their estimated tax in the first 3 quarters.

Tip: To reduce or possibly even eliminate your underpayment penalty,  search for annualizing your tax (use this exact phrase) inside TurboTax. This will take you to the underpayment penalty section and we'll take you through the steps to possibly reduce your underpayment penalty. (If you don’t see Jump to annualizing your tax in the search results, make sure you’re in your return and not on the Tax Home page.)